An LLC, or a limited liability company, offers the flexibility of a sole proprietorship without the same risks. They typically are a middle ground between a sole-proprietorship and a corporation. With an LLC, your personal assets are more protected if someone comes for your business. Regulations regarding LLCs will vary state by state so you’ll want to figure out what your state allows.
The main reason to form an LLC is to protect yourself in case you’re sued. Again, it’s also a way to legitimize your business. You want your customers to feel comfortable buying from you.
There are also many other reasons why you should consider forming an LLC. Mainly you should consider forming an LLC once you are making more than $40,000 in revenue, you’re selling a product, and you want to separate your account for liability purposes.
Either way, when making the decision to become an LLC, you have to consider, among other things, whether you’re regularly selling a product or service, making at least a few thousand in revenue, or want to start hiring employees or independent contractors.
How are LLC's taxed?
An LLC can choose to be taxed as a sole proprietorship or an S Corp.
If you haven't formed any kind of corporate structure, you are a sole proprietor or a partnership (if you have one or more partners). This is just a tax classification. When you form an LLC, you can choose to be taxed as a sole proprietorship. Essentially, this means you report your business earnings, income, and expenses with your own personal taxes.
On the other hand, LLCs can also choose to be taxed as an S Corp. An S Corp pays out salaries to its shareholders and only pays taxes on the remaining profit, which can lead to a lower tax rate. So in case you’re wondering, “Should I be an LLC or an S-corp?” the answer is: You can be both!